There’s something Orwellian about Treasurer Scott Morrison’s renewed focus on ‘good debt’ and ‘bad debt’.
In George Orwell’s novel 1984, the populace is convinced “Oceania had always been at war with Eurasia”, when in reality “it was only four years since Oceania had been at war with Eastasia and in alliance with Eurasia”.
Mr Morrison now tells us we’re in an alliance with “good debt” when just two years ago the nation was fighting an all-out war against “debt and deficit”.
He decided on Thursday to focus the budget on ‘net operating balance’, which reflects the day-to-day cost of government services. This is much better than the catch-all ‘underlying cash balance’ which confused those expenses with productive investments.
It’s a jarring shift from the rhetoric of Tony Abbott, who spent his whole prime ministership convincing Australians that a national debt of zero would bring economic nirvana. That was always a lie.
Companies that don’t borrow at appropriate levels are referred to as having a ‘lazy balance sheet’ and fall behind as a result.
Picture two cafes side by side, one debt free and one carrying a $50,000 loan for a giant new coffee machine. The increased trade that machine will bring more than compensates for the cost of servicing and repaying the debt, and it’s the company with the lazy balance sheet that falls behind.
Government investment is a bit different because, unlike a business, it borrows to produce two kinds of return – direct financial returns on some investments, but also indirect returns from the ‘socialised’ benefits of its spending.
People saving time by using a new bridge, for instance, may feel a social benefit, such as more time with their families.
But businesses that save travel time will also increase profits and pay more tax, thereby indirectly compensate the bridge’s owners – taxpayers.
A touch too much?
Borrow too much, of course, and the costs exceed the benefits.
But despite all the wailing about debt during the Abbott years, the federal government is not even close to borrowing too much.
And right now is a good time to borrow money through the bond market, for several reasons:
- The cost of borrowing over 10 years has fallen from the 3.4 per cent former treasurer Joe Hockey paid during his 2013 borrowing binge, to just 2.5 per cent;
- The economy is greatly in need of an inflationary boost via public spending, as business investment and private-sector spending are still leaving too much productive capacity idle; and
- Australia is labouring under a record load of private debt, not government debt, and that problem could be gradually reduced by ‘inflating our way out of trouble’.
It’s a goal
Mr Morrison deserves credit for shifting the Coalition’s debt rhetoric onto a more mature footing.
He warned in Thursday’s speech of the effect a credit-rating agency downgrade would have on the government’s cost of borrowing.
“Investors losing confidence in your debt means that you have to spend more on interest payments and less on the fundamental services that Australians rely on – less on schools, hospitals and infrastructure.”
Well that’s correct. If the government does not invest in new infrastructure, boost employment, and help lift Australia out of the low-inflation doldrums, it will also see long-term tax revenues and its credit-rating suffer.
Paying a large interest bill for all that debt makes sense if the economy as a whole gets back to work – on better roads, with better public transport, and with better health and education facilities.
Compare that to the frankly imbecilic tirades of Tony Abbott in early 2015: “… one thousand million [dollars] every month to pay Labor’s interest bill. That’s a brand-new tertiary hospital that could be built every single month if Labor’s interest bill did not have to be paid.”
That’s not how economies work. A large part of that interest bill was for productive assets that facilitate economic activity and grow tax revenues.
Mr Morrison’s new method of accounting in this year’s budget will demonstrate that more clearly than ever – and not a moment too soon.